Investment. MNCs invest in a host country, boosting AD and real GDP. Moreover, in the long-run MNCs’ investment helps make the economy more productive, shifts the LRAS curve rightwards, reduces inflation and increases real GDP further. This is most important for LDCs because their domestic savings may be so low that it constrains their domestic investment.

Knowledge and technology transfer. MNCs are the world’s most technologically advanced firms so they benefit host countries by bringing advanced technology, knowledge of production techniques and managerial techniques.

Consumer surplus. MNCs benefit from economies of scale so they can charge lower prices to a host country’s consumers and make consumer surplus rise. At the same time, MNCs may provide high quality goods and more choices to domestic consumers.

Costs of MNCs

Repatriate profit. MNCs may repatriate profit through transfer pricing to avoid paying taxes in a particular country. MNCs do this by producing in country A, importing from themselves in country B at a high price and exporting the output back to themselves in country B at a low price. More money is leaving country A than is coming into country A so MNCs are basically taking their profits out of country A. MNCs earn low profits in country A so they pay little taxes in that country. MNCs charge high prices in country B, earn high profits and pay a lot of taxes in country B.

Unemployment. MNCs may not create that many jobs if they use capital intensive techniques rather than labour intensive techniques. Moreover, MNCs may mostly employ skilled workers, so unskilled workers do not benefit and income distribution worsens in the host country. Also, MNCs may destroy a host country’s domestic competition and create unemployment. Furthermore, MNCs may exploit workers, pay low wages, employ children, offer poor health and safety conditions and make workers work long hours.

No knowledge and technology transfer. MNCs may not transfer much knowledge if they keep their Research and Development activities at home. Moreover, MNCs may transfer advanced technology but not the means to use that technology. Furthermore, MNCs’ technology may not be suitable for the host country. MNCs mostly use capital intensive technology but this will not benefit countries requiring labour intensive production techniques (like LDCs).

Do not create economic growth. MNCs may only follow economic growth, not create it. MNCs could thus create instability if they keep moving from country to country. Instability creates uncertainty, and this makes it harder to plan and invest, so economic growth may be adversely affected in the long-run.

Monopoly. MNCs are profit maximizers and they could become a monopoly in a host country if they destroy domestic competition. MNCs charge high prices if they have monopoly power, so consumer surplus falls.

Tax havens. MNCs may be attracted by tax havens. A tax haven is where a country allows MNCs not to pay taxes.

Environmental damage. MNCs may locate in LDCs because environmental laws are weak. MNCs may then destroy the geosphere by extracting resources, destroy the biosphere by dumping toxic waste into rivers and destroy the atmosphere by pumping dirty emissions into the air. This causes major environmental damage.